چکیده انگلیسی

A dynamic spatial model is constructed where there is a role for money and for centralized payments arrangements, and where there are aggregate fluctuations driven by fluctuations in aggregate productivity. With decentralized monetary exchange and no centralized payments arrangements, there is price level indeterminacy, and the equilibrium allocation is inefficient. A private clearinghouse arrangement improves efficiency but produces a real indeterminacy. The pricing of daylight overdrafts is irrelevant for the equilibrium allocation. Efficiency is achieved with a zero nominal interest rate on overnight central bank lending, or through private overnight interbank lending.

مقدمه انگلیسی

The objective of this paper is to study the role of the central bank in a model which permits alternative types of payment arrangements. In the model there is a role for monetary exchange, and for centralized credit, and there are deterministic fluctuations in aggregate output, consumption, and employment, driven by fluctuations in aggregate productivity. The interaction between private payments arrangements and central bank credit is shown to have important implications for the variability of relative prices, the price level, consumption, output, and employment.
Economists have long been interested in the implications of private intermediation arrangements for monetary policy. Friedman (1960) argued that there should be a separation of money from credit, imposed through a 100% reserve requirement on intermediary liabilities which serve as a medium of exchange. He viewed fluctuations in the aggregate quantity of media of exchange and the price level as detrimental, and the 100% reserve requirement would improve monetary control by insulating the money stock from shocks to the quantity of credit. However, Sargent and Wallace (1982) countered that endogenous variability in the stock of media of exchange and the price level could be consistent with Pareto optimality, and inhibiting the creation of private media of exchange through legal restrictions on private intermediation would in general result in inefficiency. In the Sargent–Wallace model, Pareto optimality is achieved either through unrestricted private intermediation, or with restricted intermediation and unrestricted central bank credit. Champ et al. (1996) extended the Sargent and Wallace model to an environment with Diamond and Dybvig (1983) banks and circulating media of exchange. They showed that legal restrictions on private intermediation, in addition to implying inefficiency, could create banking panics, in a manner consistent with empirical evidence from the U.S. National Banking era and the same period in Canadian banking history.
In part, the problems with the restrictions on financial intermediation suggested by Milton Friedman follow from the inefficiencies associated with distorted markets that would operate efficiently in the absence of these restrictions. Also, there is a tension between Friedman's ideas in Friedman 1960 and Friedman 1969, where he argues for the optimality of a monetary rule, the “Friedman rule”, which drives the nominal interest rate to zero in all states of the world. In stochastic environments, or environments with deterministic fluctuations, the Friedman rule will be achieved, in general, when the money supply fluctuates over time, albeit in a systematic fashion. In contrast, in Friedman (1960) the premise is that fluctuations in the money supply are suboptimal.
A significant quantity of recent research has focussed on the design and functioning of payments systems. The payments system is the network of private and public intermediation arrangements through which transactions take place. It can be taken to include payments intermediated by government-supplied currency, payments by check cleared through private or central bank clearing facilities, electronic interbank payments cleared through the central bank or private intermediaries, and payments using electronic cash. Some research on payments examines issues related to the pricing of credit in payments systems, incentives, and risk sharing (Fujiki et al., 1997; Rochet and Tirole 1996a and Rochet and Tirole 1996b), while other work looks at the general equilibrium implications of payments system arrangements (Freeman 1996a and Freeman 1996b; Lacker, 1997; Kahn and Roberds, 1998; Williamson, 1998; Temzelides and Williamson, 2001).
Payments system research is novel in monetary economics, in that it deals with the interaction between decentralized media of exchange (fiat money) and centralized payments arrangements. However, there are many issues associated with payments arrangements that are closely related to those addressed in the literature discussed above on the interaction between money and private intermediation. First, it is clear that intermediation by the central bank can be a close substitute for private intermediation in payments arrangements. For example, in the United States the Federal Reserve system is a major participant in check clearing and in interbank electronic payments through its Fedwire system. Second, some have argued that central bank credit related to payments system activity should be restricted, either through pricing or credit constraints (Greenspan, 1996). This issue is closely related to Friedman's notion that money and credit should be separated.
In this paper, I construct a model with spatial separation, which is related to the turnpike model of Townsend (1980). There is an absence-of-double-coincidence-of-wants problem, so that barter exchange is impossible, and the spatial structure in the model implies that IOUs issued by households will not circulate in equilibrium. For trade to take place, agents must have access to outside assets or to centralized credit arrangements. There is a role for a net-settlement payments system as it is infeasible for agents to engage in bilateral intertemporal trade, and because it is impossible for private IOUs to circulate and be redeemed by households. The model is closely related to the one constructed in Temzelides and Williamson (2001), with the novelties here being that I include deterministic fluctuations in aggregate productivity and explore different issues. A period in the model is interpreted as being a day, so that issues associated with daytime payments system credit, the pricing of daylight overdrafts, and the effects of overnight central bank lending can be explored.
The approach in the paper is to study the effects of having successively more sophisticated payments systems. That is, I first consider a model where trade through centralized institutions is shut down. Given the environment, transactions can then be carried out only using fiat money. This leads to endogenous cash-in-advance constraints, and in equilibrium households accumulate cash two periods in advance of purchases. In an equilibrium with a fixed money supply there is an indeterminacy in the price level and in relative prices, and there is an equilibrium which achieves Friedman's (1960) goals for sound monetary control. That is, in this equilibrium the price level is constant and the money supply is constant. Further, in this equilibrium productivity fluctuations are accommodated as in the Pareto optimal allocation, but the equilibrium allocation is not Pareto optimal. This inefficiency arises for reasons that Friedman would understand (see Friedman, 1969), in that the rate of return on money is too low, and households economize excessively on real cash balances.
In the second version of the model, I allow for within-period trading using a centralized payments arrangement, or clearinghouse. This centralized arrangement can be interpreted as a private clearinghouse or as central banking. Here, within-period credit is cleared on net, and settlement occurs at the end of each period in outside money. The clearinghouse relaxes some, but not all, cash-in-advance constraints and in general improves efficiency. However, this potentially produces real indeterminacy. Even though there is endogenous private intermediation which might potentially accommodate fluctuations in aggregate productivity, it is possible that an increase in the variability in aggregate productivity can increase the variability in relative prices (which in some sense reflects an increase in inefficiency) and in consumption across households within the period.
With the clearinghouse arrangement, the central bank operates a payments system with zero-nominal-interest daylight overdrafts and settlement in outside money at the end of the period. So long as the central bank charges the same interest rate on daylight overdrafts as it pays on positive balances against the central-bank-operated payments system, the pricing of daylight overdrafts is irrelevant. The effective price of a good given this arrangement is the transactions price plus the interest on the daylight overdraft which is required to make the transaction. In equilibrium, the effective price is unaffected by the interest rate on daylight overdrafts, since the transactions price adjusts to make the pricing of daylight overdrafts neutral.
If the central bank makes overnight loans at a zero nominal interest rate, financed by the issue of outside money, then this supports a Pareto efficient allocation of resources. The price level on average decreases at the rate of time preference, and is above (below) trend when aggregate productivity is below (above) trend. This optimal arrangement can also be supported with a private intermediation arrangement where there is unrestricted interbank overnight lending, and outside money is not necessary.
The paper is organized as follows. In Section 2, the model is constructed, and a Pareto optimal allocation is characterized, while in Section 3 the monetary arrangement with no centralized communication is analyzed. Section 4 contains a study of the clearinghouse arrangement, with an example and a discussion of the relationship between the velocity of money in 3 and 4 payments regimes. In Section 5, overnight discount window lending is examined. Section 6 is a conclusion.

نتیجه گیری انگلیسی

In this paper, I constructed a model with spatial separation in which there is a role for money and centralized payments arrangements, with aggregate fluctuations driven by fluctuations in aggregate productivity. When transactions are conducted only using fiat currency in the absence of a payments system, there is an indeterminacy in the price level and in relative prices. However, there exists an equilibrium where the price level and the money stock are constant, and where productivity fluctuations are accommodated. However, this equilibrium allocation is not Pareto optimal. With a clearinghouse arrangement operated by a central bank which permits payments activity with net settlement at the end of each period, there is an improvement in efficiency, but a real indeterminacy can result. An example shows that productivity shocks may not be accommodated, and that the variability in relative prices (which reflects an inefficiency) increases with the variability in productivity. The pricing of intraday overdrafts proves to be irrelevant for the equilibrium allocation. A Pareto optimal allocation is achieved with overnight lending by the central bank at a zero nominal interest rate, and this equilibrium allocation can also be supported with unregulated interbank lending and without outside money.
This paper does not address any of the issues associated with risk-bearing and incentives which seem important for some aspects of payments system design. Given what is known about the nature of private insurance and credit contracts under private information, there are good reasons to believe that some restrictions on credit arrangements in payments systems would be appropriate. Temzelides and Williamson (2001) and Williamson (1998) consider dynamic environments with private information which show how credit constraints and imperfect insurance can arise endogenously in payments arrangements. Whether or not there are “systemic risk” issues that need to be addressed in payments system design is a question which needs to be answered by future research.